Modulo 9: Gestin Integral de riesgos

Parte I

I. Fundamentos de Anisis de Riesgo

II. Riesgo de Liquidez

III. Riesgo de mercado

IV. Riesgo de Crdito

Fundamentals of Credit Analysis

I
 1. Introduction
This topic review introduces credit analysis, primarily for corporate
bonds, but considerations for credit analysis of high yield, sovereign,
and municipal bonds are also covered.

Focus on credit ratings, credit spreads, and the impact on return

when ratings and spreads change.
2. Credit risk and credit related risks affecting corporate bonds
Credit risk is the risk associated with losses stemming from the failure of a borrower to
make timely and full payments of interest or principal. Credit risk has two components:
default risk and loss severity
- Default risk is the probability that a borrower (bond issuer) fails to pay
interest or repay principal when due [ ].
- Loss severity, or loss given default, refers to the value a bond investor will lose if
the issuer default. Loss severity can be stated as a monetary amount or as a percentage
of a bonds value (principal and unpaid interest) [ USD ]
The expected loss is equal to the default risk multiplied by the loss severity (*USD).
Expected loss can likewise be stated as a monetary value or as a percentage of a bonds
rate.
The recovery rate (x) is the percentage of a bonds vlaue an investor will receive if the
issuer defaults. Loss severity as a percentage is equal to one minus the recovery rate ( 1-
x)
Bonds with credit risk trade at higher yields than bonds thought to be free of credit risk.
The difference in yield between a credit-risk bond and a credit-risk-free of similar
maturity is called its yield spread.
Bond prices are inversely related to spreads
 3. Describe seniority rankings of corporate debt and explain the
potential violation of the priority of claims in a bankruptcy proceeding

Each category of debt from the same issuer is ranked according to a priority of claim in the event
of a default
Debt can be eitheir secured debt or unsecured debt. Secured debt is backed by collateral, while
unsecured debt or debentures represent a general claim to the issuers assets and cash flow.
Secured debt has higher priority of claims than unsecured debt (ranking: Fx(secured).
The general seniority rankings for debt repayment priority are the following:

All debt within the

same category is said First lien or first mortgage
to Rank pari passu, or Senior secured debt
have same priority of
claims. All senior Junior secured debt
secured debt holders,
for example, are alike Senior unsecured debt
in a corporate Senior subordinated debt
bankruptcy.
Subordinated debt

Junior subordinated debt

4. Distinguish between corporate issuer credit rantings and issue credit
ratings and describe the rating agency practice of notching

Credit rating agencies assigns to categories of bonds with similar

credit risk.
Rating agencies rate both the issuer and the debt issues, or the
bonds themselves.
Issuer credit ratings are called corporate family ratings (CFR), while
issue-specific ratings are called corporate credit ratings (CCR).
The Issuers are rated on their senior unsecured debt
5. Distinguish between corporate issuer credit rantings and issue credit
ratings and describe the rating agency practice of notching
6. Distinguish between corporate issuer credit rantings and issue credit
ratings and describe the rating agency practice of notching

A borrower can have multiple debt issues that vary not only by
maturities and coupons but also by credit rating.

Issue credit ratings depend on the seniority of a bond issue and its
covenants

Notching is the practice by rating agencies of assigning different

ratings to bonds of the same issuer. Notching is based on several
factors, including seniority of the bonds and its impact on potential
loss severity
7. Explain risks in relying on ratings from credit rating agencies
8. Explain the components of traditional credit analysis
8. Explain the components of traditional credit analysis
8. Explain the components of traditional credit analysis
8. Explain the components of traditional credit analysis
9. Calculate and interpret financial ratios used in credit analysis
9. Calculate and interpret financial ratios used in credit analysis
9. Calculate and interpret financial ratios used in credit analysis
9. Calculate and interpret financial ratios used in credit analysis
10. Evaluate the credit quality of a corporate issuer and a bond of that
issuer, given key financial ratios for the issuer and the industry
11. Calculate return impact of spread changes
 Duration

In our introduction to the concept of duration, we described it as the

ratio of the percentage change in Price to change yield (P/ Y). Now
that we understand convexity, we know that the Price change in
response to rising rates is smaller than the price change in response
to falling rates for option-free bonds. The formula we will use for
calculating the effective duration of a bond uses the average of the
price changes in response to equal increases and decreases in yield to
account for this fact.
Duration and Convexity
 DURACIN Y CONVEXIDAD

Datos:
Plazo 4 aos
Frecuencia Semestral
Valor Facial 100
Cupn 5% Clculo de la Duracin Clculo de la Convexidad
Yield 10%
Perodo Cupn Principal Total VP (FC) t Total VP (t Total) t (t+1)Total VP (t(t+1) Total)
1 2.5 2.5 2.4 2.5 2.4 5 4.8
2 2.5 2.5 2.3 5.0 4.5 15 13.6
3 2.5 2.5 2.2 7.5 6.5 30 25.9
4 2.5 2.5 2.1 10.0 8.2 50 41.1
5 2.5 2.5 2.0 12.5 9.8 75 58.8
6 2.5 2.5 1.9 15.0 11.2 105 78.4
7 2.5 2.5 1.8 17.5 12.4 140 99.5
8 2.5 100 102.5 69.4 820.0 555.0 7380 4995.1
83.84 610.1 5317.1

PRECIO 83.84 DURACION MACAULEY 3.64 aos CONVEXIDAD 57.52 aos2

DURACION MODIFICADA -3.46 aos
12. Explain special considerations when evaluating the credit of high
yield, sovereign